Notes to Condensed Consolidated Financial Statements
June 30, 2019
(Unaudited)
Unless the context requires otherwise, references to the “Company”, “WLFC”, “we”, “us” or “our” in this Quarterly Report on Form 10-Q refer to Willis Lease Finance Corporation and its subsidiaries
.
1. Summary of Significant Accounting Policies
The significant accounting policies of the Company were described in Note 1 to the audited consolidated financial statements included in the Company’s 2018 Form 10-K . There have been no significant changes in the Company’s significant accounting policies for the
six
months ended
June 30, 2019
, except as disclosed in Note 1(d).
(a) Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Therefore, they do not include all information and footnotes normally included in annual consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the 2018 Form 10-K. In the opinion of management, the Unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting principally of normal recurring accruals) necessary for a fair presentation of the condensed consolidated balance sheets, statements of income, statements of comprehensive income, statements of redeemable preferred stock and shareholders' equity and statements of cash flows for such interim periods presented. Additionally, operating results for interim periods are not necessarily indicative of the results that can be expected for a full year.
In accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. These estimates and judgments are based on historical experience and other assumptions that management believes are reasonable. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. The significant estimates made in the accompanying Unaudited Condensed Consolidated Financial Statements include certain assumptions related to goodwill, intangible assets, long-lived assets, equipment held for sale, estimated income taxes and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions.
(b) Adjustments to Prior Period
Effective January 1, 2018, the Company adopted Accounting Standards Codification 606 – “Revenue from Contracts with Customers” (“ASC 606”) and has identified the sale of parts from engines previously transferred from the lease portfolio to the Spare Parts segment as sales to customers of the reporting entity. As such, and as reflected in the 2018 Form 10-K, the Company presents the sale of these assets on a gross basis and has reclassified the
three and six
months ended
June 30, 2018
gross revenue and costs of sale to the Spare parts and equipment sales and Cost of spare parts and equipment sales line items from the net gain (loss) presentation within the Gain on sale of leased equipment line item. For the three months ended
June 30, 2018
, the reclassification resulted in an increase in Spare parts and equipment sales of
$4.6 million
, a decrease in Gain on sale of leased equipment of
$0.2 million
and an increase in Cost of spare parts and equipment sales of
$4.4 million
with no impact to the Company's net income. For the six months ended
June 30, 2018
, the reclassification resulted in an increase in Spare parts and equipment sales of
$11.3 million
, a decrease in Gain on sale of leased equipment of
$0.3 million
and an increase in Cost of spare parts and equipment sales of
$11.0 million
with no impact to the Company's net income. The Company's Consolidated Statement of Cash Flows for the six months ended
June 30, 2018
were adjusted as a result of the reclassification by increasing cash flows provided by operating activities by
$9.3 million
and decreasing cash flows provided by investing activities by a similar amount.
(c) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, including VIEs, where the Company is the primary beneficiary in accordance with consolidation guidance. The Company first evaluates all entities in which it has an economic interest firstly to determine whether for accounting purposes the entity is a VIE or voting interest entity. If the entity is a VIE, the Company consolidates the financial statements of that entity if it is the primary beneficiary of such entity's
activities. If the entity is a voting interest entity, the Company consolidates the entity when it has a majority of voting interests in such entity. Intercompany transactions and balances have been eliminated in consolidation.
(d) Recent Accounting Pronouncements
Recent
Accounting Pronouncements Adopted by the Company
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) that amends the accounting guidance on leases for both lessees and lessors. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The FASB also subsequently issued amendments to the standard, including providing an additional and optional transition method to adopt the new standard, as well as certain practical expedients related to land easements and lessor accounting.
This ASU originally required the use of a modified retrospective approach reflecting the application of the standard to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements with the option to elect certain practical expedients. A subsequent amendment to the standard provided an additional and optional transition method that allowed entities to initially apply the new standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopted the new leases standard would continue to be in accordance with ASC Topic 840 if the optional transition method is elected. The Company adopted the standard on January 1, 2019 using the optional transition method with no restatement of comparative periods and a cumulative effect adjustment recognized as of the date of adoption.
Adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately
$4.5 million
and
$4.3 million
, respectively, as of
January 1, 2019
. The cumulative effect adjustment to retained earnings as of
January 1, 2019
was
$0.2 million
. The standard did not materially impact our consolidated financial statements.
As part of the implementation process, the Company assessed its lease arrangements and evaluated practical expedients and accounting policy elections to meet the reporting requirements of this standard. The Company also evaluated the changes in controls and processes that were necessary to implement the new standard, and no material changes were required. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients” which permitted the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
Under ASC Topic 842, a lease is a sales-type lease if any one of five criteria are met, each of which indicate that the lease, in effect, transfers control of the underlying asset to the lessee. If none of those five criteria are met, but two additional criteria are both met, indicating that the lessor has transferred substantially all the risks and benefits of the underlying asset to the lessee, the lease is a direct financing lease. All leases that are not sales-type or direct financing leases are operating leases. Furthermore, the Company will assess on an ongoing basis, the updated guidance provided for sale leaseback transactions and whether failed sale leaseback accounting treatment is triggered. As lessor, the Company's existing leases remained as operating leases under the new standard. In addition, due to the new standard’s narrowed definition of initial direct costs, the Company expensed as incurred certain lease origination costs that were previously capitalized as initial direct costs and amortized as expenses over the lease term.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. As a result, for those leases that qualify, the Company did not recognize ROU assets or lease liabilities, including for existing short-term leases. The Company also elected the practical expedient to not separate lease and non-lease components for the majority of its leases as both lessee and lessor.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The ASU is targeted at simplifying the application of hedge accounting and aims at aligning the recognition and presentation of the effects of hedge instruments and hedge items. This guidance became effective for the Company on January 1, 2019 and it did not result in an adjustment to the opening balance of retained earnings for the Company's existing cash flow hedge. Additionally, the presentation and disclosure aspect of ASU 2017-12 was applied on a prospective basis within Note 6.
In June 2018, the FASB issued ASU 2018-07,
“
Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting.
”
The ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from non-employees.
The Company adopted this guidance effective January 1, 2019 and it did not materially impact our consolidated financial statements.
Recent Accounting Pronouncements To Be Adopted by the Company
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. ASU 2016-13 affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU clarifies receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies various scoping and other issues arising from ASU 2016-13. This ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company plans to adopt this guidance effective January 1, 2020 and is currently evaluating the potential impact adoption will have on the consolidated financial statements and related disclosures.
2. Leases
As lessor, and as of
June 30, 2019
, all of our leases were operating leases with the exception of two leases entered into during the first quarter of 2019 which are classified as notes receivables under the failed sale leaseback guidance provided by ASC 842.
As lessee, the significant majority of leases the Company enters are for real estate (office and warehouse space for our operations as well as automobiles). These lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of January 1, 2019, the Company did not have any significant leases that had not yet commenced but that created significant rights and obligations. Leases with terms of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Some of the Company's leases include variable non-lease components (e.g., taxes) which are not separated from associated lease components (e.g. fixed rent, common-area maintenance costs, vehicle protection plans and other service fees) as elected under the practical expedient package provided by ASC 842.
The Company's leases have remaining lease terms of
one
to
eight
years, some of which include options to renew or extend the lease term from
one
to
five
years. Our automobile leases include an option to purchase the vehicle at lease termination. The depreciable life of assets is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
The exercise of lease renewal options or purchase at lease termination is at the Company's sole discretion. If it is reasonably certain that we will exercise such options, the periods covered by such options are included in the lease term and are recognized as part of our ROU assets and lease liabilities.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
June 30, 2019
|
|
|
|
|
(in thousands, except lease term and discount rate)
|
Assets
|
|
|
|
|
Operating lease right-of-use assets
|
|
Other assets
|
|
$
|
4,626
|
|
Total leased assets
|
|
|
|
$
|
4,626
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Operating lease right-of-use liabilities
|
|
Accounts payable and accrued expenses
|
|
$
|
4,410
|
|
Total lease liabilities
|
|
|
|
$
|
4,410
|
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
|
5.53
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
|
4.5
|
%
|
Future maturities of the Company's operating lease liabilities at
June 30, 2019
are as follows:
|
|
|
|
|
|
Year
|
|
(in thousands)
|
Remaining for year ending December 31, 2019
|
|
$
|
536
|
|
2020
|
|
1,013
|
|
2021
|
|
941
|
|
2022
|
|
768
|
|
2023
|
|
510
|
|
Thereafter
|
|
1,277
|
|
Total lease payments
|
|
5,045
|
|
Less: interest
|
|
(635
|
)
|
Total lease liabilities
|
|
$
|
4,410
|
|
The following table represents future minimum lease payments under noncancelable operating leases at December 31, 2018 as presented in the Company’s 2018 Form 10-K:
|
|
|
|
|
|
Year
|
|
(in thousands)
|
2019
|
|
$
|
1,172
|
|
2020
|
|
676
|
|
2021
|
|
638
|
|
2022
|
|
645
|
|
2023
|
|
483
|
|
Thereafter
|
|
1,183
|
|
|
|
$
|
4,797
|
|
The components of lease expense for the three and six months ended
June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Lease expense
|
|
Classification
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
|
|
|
|
(in thousands)
|
Operating lease cost
|
|
General and administrative
|
|
$
|
360
|
|
|
$
|
741
|
|
Net lease cost
|
|
|
|
$
|
360
|
|
|
$
|
741
|
|
Supplemental cash flow information related to leases for the
six
months ended
June 30, 2019
was as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
500
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
495
|
|
3. Revenue from Contracts with Customers
The following tables disaggregate revenue by major source for the
three and six
months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
Leasing and Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Leasing revenue
|
|
$
|
71,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,500
|
|
Spare parts and equipment sales
|
|
266
|
|
|
14,320
|
|
|
—
|
|
|
14,586
|
|
Gain on sale of leased equipment
|
|
5,120
|
|
|
—
|
|
|
—
|
|
|
5,120
|
|
Managed services
|
|
1,023
|
|
|
—
|
|
|
—
|
|
|
1,023
|
|
Other revenue
|
|
3,560
|
|
|
31
|
|
|
(23
|
)
|
|
3,568
|
|
Total revenue
|
|
$
|
81,469
|
|
|
$
|
14,351
|
|
|
$
|
(23
|
)
|
|
$
|
95,797
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Leasing and Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Leasing revenue
|
|
$
|
65,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65,126
|
|
Spare parts and equipment sales
|
|
—
|
|
|
11,653
|
|
|
—
|
|
|
11,653
|
|
Gain on sale of leased equipment
|
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Managed services
|
|
1,252
|
|
|
—
|
|
|
—
|
|
|
1,252
|
|
Other revenue
|
|
604
|
|
|
210
|
|
|
(195
|
)
|
|
619
|
|
Total revenue
|
|
$
|
67,034
|
|
|
$
|
11,863
|
|
|
$
|
(195
|
)
|
|
$
|
78,702
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Leasing and Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Leasing revenue
|
|
$
|
145,219
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145,219
|
|
Spare parts and equipment sales
|
|
2,751
|
|
|
29,337
|
|
|
—
|
|
|
32,088
|
|
Gain on sale of leased equipment
|
|
14,690
|
|
|
—
|
|
|
—
|
|
|
14,690
|
|
Managed services
|
|
2,361
|
|
|
—
|
|
|
—
|
|
|
2,361
|
|
Other revenue
|
|
5,200
|
|
|
125
|
|
|
(117
|
)
|
|
5,208
|
|
Total revenue
|
|
$
|
170,221
|
|
|
$
|
29,462
|
|
|
$
|
(117
|
)
|
|
$
|
199,566
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Leasing and Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Leasing revenue
|
|
$
|
120,211
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
120,211
|
|
Spare parts and equipment sales
|
|
—
|
|
|
24,639
|
|
|
—
|
|
|
24,639
|
|
Gain on sale of leased equipment
|
|
597
|
|
|
—
|
|
|
—
|
|
|
597
|
|
Managed services
|
|
2,173
|
|
|
—
|
|
|
—
|
|
|
2,173
|
|
Other revenue
|
|
1,533
|
|
|
1,323
|
|
|
(1,277
|
)
|
|
1,579
|
|
Total revenue
|
|
$
|
124,514
|
|
|
$
|
25,962
|
|
|
$
|
(1,277
|
)
|
|
$
|
149,199
|
|
_____________________________
|
|
(1)
|
Represents revenue generated between our reportable segments.
|
4. Investments
In 2011, the Company entered into an agreement with Mitsui & Co., Ltd. to participate in a joint venture formed as a Dublin-based Irish limited company - Willis Mitsui & Company Engine Support Limited (“WMES”) for the purpose of acquiring and leasing jet engines. Each partner holds a
fifty
percent interest in the joint venture and the Company uses the equity method in recording investment activity. As of
June 30, 2019
, WMES owned a lease portfolio of
33
engines and
six
aircraft with a net book value of
$309.0 million
.
In 2014, the Company entered into an agreement with China Aviation Supplies Import & Export Corporation (“CASC”) to participate in a joint venture named CASC Willis Engine Lease Company Limited (“CASC Willis”), a joint venture based in Shanghai, China. Each partner holds a
fifty
percent interest in the joint venture and the Company uses the equity method in recording investment activity. CASC Willis acquires and leases jet engines to Chinese airlines and concentrates on the demand for leased commercial aircraft engines and aviation assets in the People’s Republic of China. As of
June 30, 2019
, CASC Willis owned a lease portfolio of
four
engines with a net book value of
$51.9 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
WMES
|
|
CASC Willis
|
|
Total
|
|
|
(in thousands)
|
Investment in joint ventures as of December 31, 2018
|
|
$
|
34,183
|
|
|
$
|
13,758
|
|
|
$
|
47,941
|
|
Earnings from joint ventures
|
|
2,565
|
|
|
57
|
|
|
2,622
|
|
Investment
|
|
5,013
|
|
|
—
|
|
|
5,013
|
|
Distribution
|
|
(3,300
|
)
|
|
—
|
|
|
(3,300
|
)
|
Foreign currency translation adjustment
|
|
—
|
|
|
(34
|
)
|
|
(34
|
)
|
Investment in joint ventures as of June 30, 2019
|
|
$
|
38,461
|
|
|
$
|
13,781
|
|
|
$
|
52,242
|
|
“Other revenue” on the Condensed Consolidated Statements of Income includes management fees earned of
$0.6 million
and
$0.5 million
during the three months ended
June 30, 2019
and
2018
, respectively, and
$1.1 million
and
$1.2 million
during the
six
months ended
June 30, 2019
and
2018
, respectively. These fees related to the servicing of engines for the WMES lease portfolio.
During the
six
months ended
June 30, 2019
, the Company sold
five
aircraft to WMES for
$75.5 million
. During the
six
months ended
June 30, 2018
, the Company sold
one
aircraft and
one
engine to WMES for
$21.4 million
. There were no aircraft or engine sales to CASC Willis during the
six
months ended
June 30, 2019
and
2018
.
Summarized financial information for
100%
of WMES is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
(in thousands)
|
Revenue
|
$
|
13,594
|
|
|
$
|
9,040
|
|
|
$
|
23,137
|
|
|
$
|
16,646
|
|
Expenses
|
9,516
|
|
|
7,551
|
|
|
17,721
|
|
|
14,354
|
|
WMES income before income taxes
|
$
|
4,078
|
|
|
$
|
1,489
|
|
|
$
|
5,416
|
|
|
$
|
2,292
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
Total assets
|
$
|
315,173
|
|
|
$
|
274,744
|
|
Total liabilities
|
230,759
|
|
|
198,534
|
|
Total WMES net equity
|
$
|
84,414
|
|
|
$
|
76,210
|
|
5. Debt Obligations
Debt obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
Credit facility at a floating rate of interest of one-month LIBOR plus 1.375% at June 30, 2019, secured by engines. The facility has a committed amount of $1.0 billion at June 30, 2019, which revolves until the maturity date of June 2024
|
$
|
397,000
|
|
|
$
|
427,000
|
|
WEST IV Series A 2018 term notes payable at a fixed rate of interest of 4.75%, maturing in September 2043, secured by engines
|
315,706
|
|
|
323,075
|
|
WEST IV Series B 2018 term notes payable at a fixed rate of interest of 5.44%, maturing in September 2043, secured by engines
|
45,101
|
|
|
46,154
|
|
WEST III Series A 2017 term notes payable at a fixed rate of interest of 4.69%, maturing in August 2042, secured by engines
|
266,206
|
|
|
274,205
|
|
WEST III Series B 2017 term notes payable at a fixed rate of interest of 6.36%, maturing in August 2042, secured by engines
|
38,068
|
|
|
39,212
|
|
WEST II Series A 2012 term notes payable at a fixed rate of interest of 5.50%, maturing in September 2037, secured by engines
|
226,898
|
|
|
237,847
|
|
Note payable at three-month LIBOR plus a margin ranging from 1.85% to 5.25% at June 30, 2019, maturing in July 2022, secured by engines
|
7,841
|
|
|
—
|
|
Note payable at fixed interest rates ranging from 2.60% to 2.97%, maturing in July 2024, secured by an aircraft
|
10,026
|
|
|
10,937
|
|
|
1,306,846
|
|
|
1,358,430
|
|
Less: unamortized debt issuance costs
|
(21,289
|
)
|
|
(21,081
|
)
|
Total debt obligations
|
$
|
1,285,557
|
|
|
$
|
1,337,349
|
|
Principal outstanding at
June 30, 2019
, is repayable as follows:
|
|
|
|
|
|
Year
|
|
(in thousands)
|
2019
|
|
$
|
28,099
|
|
2020
|
|
56,128
|
|
2021
|
|
56,418
|
|
2022 (includes $173.8 million outstanding on WEST II Series A 2012 term notes)
|
|
212,671
|
|
2023
|
|
34,008
|
|
Thereafter
|
|
919,522
|
|
Total
|
|
$
|
1,306,846
|
|
In June 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (“Amended Credit Agreement”) which increased the revolving credit facility from
$890.0 million
to
$1.0 billion
. The Amended Credit Agreement incorporates an accordion feature that can expand the credit facility up to
$1.3 billion
, extends the maturity of the credit facility to June 2024 and provides for certain other amendments to covenants, interest rates and commitment fees. As of June 30, 2019, there was
$397.0 million
outstanding on the revolving credit facility. Any principal amounts outstanding under the revolving credit facility are due at maturity. Pursuant to the Amended Credit Agreement, all obligations under the revolving credit facility are collateralized by the title and interest of the Company and certain of its subsidiaries, and to substantially all of its assets and properties.
In connection with entering into the Amended Credit Agreement in June 2019, the Company incurred and deferred an additional
$2.9 million
of debt issuance costs, and recognized a loss on debt extinguishment of
$0.2 million
relating to the Third Amendment. Unamortized debt issuance costs are included as a reduction to “Debt Obligations” in our consolidated balance sheets and are amortized to “Interest expense” on a straight-line basis through the maturity date of the Amended Credit Agreement.
In February 2019, the Company entered into a new
$8.1 million
loan with a financial institution with a maturity date of July 2022. Interest is payable at three-month LIBOR plus a margin ranging from
1.85%
to
5.25%
and principal and interest are paid quarterly. The loan is secured by two engines.
Subsequent to June 30, 2019, and effective July 15, 2019, the Company’s note payable secured by a corporate aircraft was repriced at a fixed interest rate of
3.18%
. The outstanding balance of the loan was
$10.0 million
at June 30, 2019 and will continue to mature in July 2024.
Virtually all of the above debt requires ongoing compliance with certain financial covenants, including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. The Company also is required to comply with certain negative financial covenants such as prohibitions on liens, advances, change in business, sales of assets, dividends and stock repurchases. These covenants are tested either monthly or quarterly and the Company was in full compliance with all financial covenant requirements at
June 30, 2019
.
6. Derivative Instruments
The Company periodically holds interest rate derivative instruments to mitigate exposure to changes in interest rates, to predominantly one-month LIBOR, with
$397.0 million
and
$427.0 million
of such borrowings at
June 30, 2019
and
December 31, 2018
, respectively, tied to this rate. As a matter of policy, management does not use derivatives for speculative purposes. During 2016, the Company entered into
one
interest rate swap agreement which has a notional outstanding amount of
$100.0 million
, with a remaining term of
22
months as of
June 30, 2019
. The derivative was designated in a cash flow hedging relationship.
The Company evaluated the effectiveness of the swap to hedge its interest rate risk associated with its variable rate debt and concluded at the swap inception date that the swap was highly effective in hedging that risk. The Company will evaluate the effectiveness of the hedging relationship on an ongoing basis.
The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparty’s risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period. The Company applies hedge accounting and accounts for the change in fair value of its cash flow hedges through other comprehensive income for all derivative instruments.
The net fair value of the interest rate swap was a
$22 thousand
net liability and a
$1.7 million
net asset as of
June 30, 2019
and
December 31, 2018
, respectively. The Company recorded a
$(0.2) million
and
$(0.4) million
adjustment to interest expense during the three and six months ended
June 30, 2019
, respectively, and a
$(0.1) million
and
$(0.1) million
adjustment to interest expense during the three and six months ended
June 30, 2018
, respectively, from derivative instruments.
Effect of Derivative Instruments on Earnings in the Statements of Income and on Comprehensive Income
The following tables provide additional information about the financial statement effects related to the cash flow hedges for the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of (Loss) Gain Recognized
in OCI on Derivatives
(Effective Portion)
|
|
Location of Gain
Reclassified from
Accumulated OCI into
Income
(Effective Portion)
|
|
Amount of Gain Recognized
from Accumulated OCI into Income
(Effective Portion)
|
|
Three Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Interest rate contracts
|
|
$
|
(1,071
|
)
|
|
$
|
384
|
|
|
Interest expense
|
|
$
|
194
|
|
|
$
|
94
|
|
Total
|
|
$
|
(1,071
|
)
|
|
$
|
384
|
|
|
Total
|
|
$
|
194
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount of (Loss) Gain Recognized
in OCI on Derivatives
(Effective Portion)
|
|
Location of Gain
Reclassified from
Accumulated OCI into
Income
(Effective Portion)
|
|
Amount of Gain Recognized
from Accumulated OCI into Income
(Effective Portion)
|
|
Six Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
Interest rate contracts
|
|
$
|
(1,684
|
)
|
|
$
|
1,415
|
|
|
Interest expense
|
|
$
|
397
|
|
|
$
|
69
|
|
Total
|
|
$
|
(1,684
|
)
|
|
$
|
1,415
|
|
|
Total
|
|
$
|
397
|
|
|
$
|
69
|
|
The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur. The ineffective portion of the hedges, if any, is recorded in earnings in the current period. There was no ineffectiveness in the hedge for the period ended
June 30, 2019
.
Counterparty Credit Risk
The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The counterparty for the interest rate swap was a large financial institution in the United States that possessed an investment grade credit rating. Based on this rating, the Company believes that the counterparty was creditworthy and that their continuing performance under the hedging agreement was probable and did not require the counterparty to provide collateral or other security to the Company.
7. Income Taxes
Income tax expense for the three and six months ended
June 30, 2019
was
$4.8 million
and
$11.8 million
, respectively. The effective tax rate for the three months and six months ended
June 30, 2019
was
22.1%
and
23.7%
, respectively. Income tax expense for the three and six months ended
June 30, 2018
was
$3.2 million
and $
5.8 million
, respectively. The effective tax rate for the three and six months ended
June 30, 2018
was
27.9%
and
27.2%
, respectively.
The Company records tax expense or benefit for unusual or infrequent items discretely in the period in which they occur. The Company’s tax rate is subject to change based on changes in the mix of assets leased to domestic and foreign lessees, the proportions of revenue generated within and outside of California, the amount of executive compensation exceeding $1.0 million as defined in IRS code 162(m) and numerous other factors, including changes in tax law.
8. Fair Value Measurements
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of judgment, and therefore cannot be determined with precision.
Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
|
|
•
|
Cash and cash equivalents, restricted cash, operating lease related receivables, and accounts payable
: The amounts reported in the accompanying Consolidated Balance Sheets approximate fair value due to their short-term nature.
|
|
|
•
|
Notes receivables
:
The carrying amount of the Company’s outstanding balance on its Notes receivables as of
June 30, 2019
and
December 31, 2018
was estimated to have a fair value of approximately
$30.9 million
and
$0.2 million
, respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each period end (Level 2 inputs).
|
|
|
•
|
Debt obligations
: The carrying amount of the Company’s outstanding balance on its Debt obligations as of
June 30, 2019
and
December 31, 2018
was estimated to have a fair value of approximately
$1,265.0 million
and
$1,348.1 million
respectively, based on the fair value of estimated future payments calculated using interest rates that approximate prevailing market rates at each period end (Level 2 inputs).
|
Assets Measured and Recorded at Fair Value on a Recurring Basis
As of
June 30, 2019
and
December 31, 2018
, the Company measured the fair value of its interest rate swap of
$100.0 million
(notional amount) based on Level 2 inputs, due to the usage of inputs that can be corroborated by observable market data. The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. The interest rate swap had a net fair value representing a
$22 thousand
net liability and a net asset of
$1.7 million
, as of
June 30, 2019
and
December 31, 2018
, respectively. For the
six
months ended
June 30, 2019
and
2018
,
$(0.4) million
and
$(0.1) million
was realized through the income statement as an adjustment to Interest expense.
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company determines fair value of long-lived assets held and used, such as Equipment held for operating lease and Equipment held for sale, by reference to independent appraisals, quoted market prices (e.g. an offer to purchase) and other factors. An impairment charge is recorded when the carrying value of the asset exceeds its fair value. The Company used Level 2 inputs to measure write-downs of equipment held for lease and equipment held for sale as of
June 30, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Written Down to Fair Value
|
|
Total Losses
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Six Months Ended June 30,
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
(in thousands)
|
Equipment held for lease
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,756
|
|
|
$
|
—
|
|
|
$
|
17,756
|
|
|
$
|
4,367
|
|
|
$
|
3,400
|
|
Equipment held for sale
|
—
|
|
|
3,450
|
|
|
—
|
|
|
3,450
|
|
|
—
|
|
|
472
|
|
|
—
|
|
|
472
|
|
|
—
|
|
|
178
|
|
Total
|
$
|
—
|
|
|
$
|
3,450
|
|
|
$
|
—
|
|
|
$
|
3,450
|
|
|
$
|
—
|
|
|
$
|
18,228
|
|
|
$
|
—
|
|
|
$
|
18,228
|
|
|
$
|
4,367
|
|
|
$
|
3,578
|
|
A write-down of
$4.4 million
was recorded during the
six
months ended
June 30, 2019
for
four
engines due to a management decision to part-out the engines or sell the engines, in which the net book values exceeded the estimated proceeds. A write-down of
$3.6 million
was recorded during the
six
months ended
June 30, 2018
for
three
engines due to a management decision to part-out the engines, in which the net book values exceeded the estimated proceeds.
9. Earnings Per Share
Basic earnings per common share is computed by dividing net income, less preferred stock dividends and accretion of preferred stock issuance costs, by the weighted average number of common shares outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the vesting of restricted stock using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. Additionally, redeemable preferred stock is not convertible and does not affect dilutive shares.
There were
no
anti-dilutive shares during the three months ended
June 30, 2019
and
2 thousand
anti-dilutive shares excluded from the computation of diluted weighted average earnings per common share for the six months ended
June 30, 2019
. The computation of diluted weighted average earnings per share does not include
0.3 million
and
0.1 million
restricted shares for the
three and six
months ended
June 30, 2018
, as the effect of their inclusion would have been antidilutive to earnings per share.
The following table presents the calculation of basic and diluted EPS (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income attributable to common shareholders
|
$
|
16,144
|
|
|
$
|
7,528
|
|
|
$
|
36,200
|
|
|
$
|
13,789
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
5,866
|
|
|
5,878
|
|
|
5,823
|
|
|
5,990
|
|
Potentially dilutive common shares
|
195
|
|
|
113
|
|
|
197
|
|
|
133
|
|
Diluted weighted average common shares outstanding
|
6,061
|
|
|
5,991
|
|
|
6,020
|
|
|
6,123
|
|
|
|
|
|
|
|
|
|
Basic weighted average earnings per common share
|
$
|
2.75
|
|
|
$
|
1.28
|
|
|
$
|
6.22
|
|
|
$
|
2.30
|
|
Diluted weighted average earnings per common share
|
$
|
2.66
|
|
|
$
|
1.26
|
|
|
$
|
6.01
|
|
|
$
|
2.25
|
|
10. Equity
Common Stock Repurchase
In September 2012, the Company announced that its Board of Directors authorized a plan to repurchase up to
$100.0 million
of its common stock over the next
five
years. The Board of Directors reaffirmed the repurchase plan in 2016 and extended the plan to December 31, 2018. Effective December 31, 2018, the Board of Directors approved the renewal of the repurchase plan extending the plan through December 31, 2020 and amending the plan to allow for repurchases of up to
$60.0 million
of the Company's common stock until such date. Repurchased shares are immediately retired. During the
six
months ended
June 30, 2019
, the Company repurchased a total of
72,324
shares of common stock for approximately
$3.6 million
at a weighted average price of
$49.29
per share. At
June 30, 2019
, approximately
$56.4 million
is available to purchase shares under the plan.
Redeemable Preferred Stock
Dividends:
The Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of
6.5%
per share. During the
six
months ended
June 30, 2019
and
2018
, the Company paid total dividends of
$1.6 million
, respectively, on the Series A-1 and Series A-2 Preferred Stock. For additional disclosures on the Company’s Redeemable Preferred Stock, refer to Note 11 in the 2018 Form 10-K.
11. Stock-Based Compensation Plans
The components of stock-based compensation expense for the
three and six
months ended
June 30, 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in thousands)
|
|
(in thousands)
|
2007 Stock Incentive Plan
|
$
|
1,143
|
|
|
$
|
1,660
|
|
|
$
|
2,402
|
|
|
$
|
2,565
|
|
2018 Stock Incentive Plan
|
975
|
|
|
—
|
|
|
975
|
|
|
—
|
|
Employee Stock Purchase Plan
|
4
|
|
|
—
|
|
|
10
|
|
|
20
|
|
Total Stock Compensation Expense
|
$
|
2,122
|
|
|
$
|
1,660
|
|
|
$
|
3,387
|
|
|
$
|
2,585
|
|
The 2007 Stock Incentive Plan (the “2007 Plan”) was adopted in May 2007. Under the 2007 Plan, a total of
2,800,000
shares were authorized for stock-based compensation available in the form of either restricted stock awards (“RSAs”) or stock options. The RSAs are subject to service-based vesting, typically between
one
and
three
years, where a specific period of continued employment must pass before an award vests. The expense associated with these awards is recognized on a straight-line basis over the respective vesting period, with forfeitures accounted for as they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date fair value of the award tranche that is actually vested at that date. As of June 30, 2019,
no
stock options outstanding under the 2007 Plan.
The 2018 Stock Incentive Plan (the “2018 Plan”) was adopted in May 2018. Under the 2018 Plan, a total of
800,000
shares are authorized for stock-based compensation, plus the number of shares remaining under the 2007 Plan and any future forfeited awards under the 2007 Plan, in the form of RSAs. The RSAs are subject to service-based vesting, typically between
one
and
three
years, where a specific period of continued employment or service must pass before an award vests. The expense associated with these awards is recognized on a straight-line basis over the respective vesting period, with forfeitures accounted for as they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date fair value of the award tranche that is actually vested at that date.
As of
June 30, 2019
, the Company has granted
279,400
RSAs under the 2018 Plan and has
613,996
shares available for future issuance. The fair value of the restricted stock awards equaled the stock price at the grant date.
The following table summarizes restricted stock activity during the
six
months ended
June 30, 2019
:
|
|
|
|
|
Shares
|
Restricted stock at December 31, 2018
|
417,890
|
|
Shares granted
|
279,400
|
|
Shares forfeited
|
(2,666
|
)
|
Shares vested
|
(183,624
|
)
|
Restricted stock at June 30, 2019
|
511,000
|
|
Under the Employee Stock Purchase Plan (“ESPP”), as amended and restated effective April 1, 2018,
325,000
shares of common stock have been reserved for issuance. Eligible employees may designate not more than
10%
of their cash compensation to be deducted each pay period for the purchase of common stock under the Purchase Plan. Participants may purchase not more than
1,000
shares or
$25,000
of common stock in any one calendar year. Each January 31 and July 31 shares of common stock are purchased with the employees’ payroll deductions from the immediately preceding six months at a price per share of
85%
of the lesser of the market price of the common stock on the purchase date or the market price of the common stock on the date of entry into an offering period. In the
six
months ended
June 30, 2019
and
2018
,
6,732
and
5,497
shares of common stock, respectively, were issued under the ESPP. The Company issues new shares through its transfer agent upon employee stock purchase.
12. Reportable Segments
The Company has
two
reportable segments: (i) Leasing and Related Operations which involves acquiring and leasing, primarily pursuant to operating leases, commercial aircraft, aircraft engines and other aircraft equipment and the selective purchase and resale of commercial aircraft engines and other aircraft equipment and other related businesses and (ii) Spare Parts Sales which involves the purchase and resale of after-market engine parts, whole engines, engine modules and portable aircraft components.
The Company evaluates the performance of each of the segments based on profit or loss after general and administrative expenses. While the Company believes there are synergies between the
two
business segments, the segments are managed separately because each requires different business strategies.
The following tables present a summary of the reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Leasing and
Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Revenue:
|
|
|
|
|
|
|
|
|
Lease rent revenue
|
|
$
|
45,025
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,025
|
|
Maintenance reserve revenue
|
|
26,475
|
|
|
—
|
|
|
—
|
|
|
26,475
|
|
Spare parts and equipment sales
|
|
266
|
|
|
14,320
|
|
|
—
|
|
|
14,586
|
|
Gain on sale of leased equipment
|
|
5,120
|
|
|
—
|
|
|
—
|
|
|
5,120
|
|
Other revenue
|
|
4,583
|
|
|
31
|
|
|
(23
|
)
|
|
4,591
|
|
Total revenue
|
|
81,469
|
|
|
14,351
|
|
|
(23
|
)
|
|
95,797
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
20,023
|
|
|
20
|
|
|
—
|
|
|
20,043
|
|
Cost of spare parts and equipment sales
|
|
252
|
|
|
12,333
|
|
|
—
|
|
|
12,585
|
|
Write-down of equipment
|
|
3,262
|
|
|
—
|
|
|
—
|
|
|
3,262
|
|
General and administrative
|
|
19,919
|
|
|
1,470
|
|
|
—
|
|
|
21,389
|
|
Technical expense
|
|
1,407
|
|
|
—
|
|
|
—
|
|
|
1,407
|
|
Net finance costs:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
16,781
|
|
|
—
|
|
|
—
|
|
|
16,781
|
|
Loss on debt extinguishment
|
|
220
|
|
|
—
|
|
|
—
|
|
|
220
|
|
Total finance costs
|
|
17,001
|
|
|
—
|
|
|
—
|
|
|
17,001
|
|
Total expenses
|
|
61,864
|
|
|
13,823
|
|
|
—
|
|
|
75,687
|
|
Earnings from operations
|
|
$
|
19,605
|
|
|
$
|
528
|
|
|
$
|
(23
|
)
|
|
$
|
20,110
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Leasing and
Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Revenue:
|
|
|
|
|
|
|
|
|
Lease rent revenue
|
|
$
|
43,081
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,081
|
|
Maintenance reserve revenue
|
|
22,045
|
|
|
—
|
|
|
—
|
|
|
22,045
|
|
Spare parts and equipment sales (2)
|
|
—
|
|
|
11,653
|
|
|
—
|
|
|
11,653
|
|
Gain on sale of leased equipment (2)
|
|
52
|
|
|
—
|
|
|
—
|
|
|
52
|
|
Other revenue
|
|
1,856
|
|
|
210
|
|
|
(195
|
)
|
|
1,871
|
|
Total revenue
|
|
67,034
|
|
|
11,863
|
|
|
(195
|
)
|
|
78,702
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
18,297
|
|
|
87
|
|
|
—
|
|
|
18,384
|
|
Cost of spare parts and equipment sales (2)
|
|
—
|
|
|
10,305
|
|
|
—
|
|
|
10,305
|
|
Write-down of equipment
|
|
3,578
|
|
|
—
|
|
|
—
|
|
|
3,578
|
|
General and administrative
|
|
15,683
|
|
|
1,099
|
|
|
—
|
|
|
16,782
|
|
Technical expense
|
|
3,232
|
|
|
—
|
|
|
—
|
|
|
3,232
|
|
Net finance costs:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
15,138
|
|
|
—
|
|
|
—
|
|
|
15,138
|
|
Loss on debt extinguishment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total finance costs
|
|
15,138
|
|
|
—
|
|
|
—
|
|
|
15,138
|
|
Total expenses
|
|
55,928
|
|
|
11,491
|
|
|
—
|
|
|
67,419
|
|
Earnings from operations
|
|
$
|
11,106
|
|
|
$
|
372
|
|
|
$
|
(195
|
)
|
|
$
|
11,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Leasing and
Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Revenue:
|
|
|
|
|
|
|
|
|
Lease rent revenue
|
|
$
|
93,394
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,394
|
|
Maintenance reserve revenue
|
|
51,825
|
|
|
—
|
|
|
—
|
|
|
51,825
|
|
Spare parts and equipment sales
|
|
2,751
|
|
|
29,337
|
|
|
—
|
|
|
32,088
|
|
Gain on sale of leased equipment
|
|
14,690
|
|
|
—
|
|
|
—
|
|
|
14,690
|
|
Other revenue
|
|
7,561
|
|
|
125
|
|
|
(117
|
)
|
|
7,569
|
|
Total revenue
|
|
170,221
|
|
|
29,462
|
|
|
(117
|
)
|
|
199,566
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
40,259
|
|
|
42
|
|
|
—
|
|
|
40,301
|
|
Cost of spare parts and equipment sales
|
|
2,088
|
|
|
24,909
|
|
|
—
|
|
|
26,997
|
|
Write-down of equipment
|
|
4,367
|
|
|
—
|
|
|
—
|
|
|
4,367
|
|
General and administrative
|
|
39,893
|
|
|
2,936
|
|
|
—
|
|
|
42,829
|
|
Technical expense
|
|
3,194
|
|
|
1
|
|
|
—
|
|
|
3,195
|
|
Net finance costs:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
34,660
|
|
|
—
|
|
|
—
|
|
|
34,660
|
|
Loss on debt extinguishment
|
|
220
|
|
|
—
|
|
|
—
|
|
|
220
|
|
Total finance costs
|
|
34,880
|
|
|
—
|
|
|
—
|
|
|
34,880
|
|
Total expenses
|
|
124,681
|
|
|
27,888
|
|
|
—
|
|
|
152,569
|
|
Earnings from operations
|
|
$
|
45,540
|
|
|
$
|
1,574
|
|
|
$
|
(117
|
)
|
|
$
|
46,997
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Leasing and
Related Operations
|
|
Spare Parts Sales
|
|
Eliminations (1)
|
|
Total
|
Revenue:
|
|
|
|
|
|
|
|
|
Lease rent revenue
|
|
$
|
82,726
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82,726
|
|
Maintenance reserve revenue
|
|
37,485
|
|
|
—
|
|
|
—
|
|
|
37,485
|
|
Spare parts and equipment sales (2)
|
|
—
|
|
|
24,639
|
|
|
—
|
|
|
24,639
|
|
Gain on sale of leased equipment (2)
|
|
597
|
|
|
—
|
|
|
—
|
|
|
597
|
|
Other revenue
|
|
3,706
|
|
|
1,323
|
|
|
(1,277
|
)
|
|
3,752
|
|
Total revenue
|
|
124,514
|
|
|
25,962
|
|
|
(1,277
|
)
|
|
149,199
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
35,565
|
|
|
174
|
|
|
—
|
|
|
35,739
|
|
Cost of spare parts and equipment sales (2)
|
|
—
|
|
|
21,692
|
|
|
—
|
|
|
21,692
|
|
Write-down of equipment
|
|
3,578
|
|
|
—
|
|
|
—
|
|
|
3,578
|
|
General and administrative
|
|
30,178
|
|
|
2,215
|
|
|
—
|
|
|
32,393
|
|
Technical expense
|
|
6,909
|
|
|
—
|
|
|
—
|
|
|
6,909
|
|
Net finance costs:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
28,732
|
|
|
—
|
|
|
—
|
|
|
28,732
|
|
Loss on debt extinguishment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total finance costs
|
|
28,732
|
|
|
—
|
|
|
—
|
|
|
28,732
|
|
Total expenses
|
|
104,962
|
|
|
24,081
|
|
|
—
|
|
|
129,043
|
|
Earnings from operations
|
|
$
|
19,552
|
|
|
$
|
1,881
|
|
|
$
|
(1,277
|
)
|
|
$
|
20,156
|
|
______________________________
|
|
(1)
|
Represents revenue generated between our operating segments.
|
|
|
(2)
|
Effective January 1, 2018, the Company adopted ASC 606 and has identified the sale of parts from engines previously transferred from the lease portfolio to the Spare Parts segment as sales to customers of the reporting entity. As such, the Company presents the sale of these assets on a gross basis and have reclassified the three and six months ended June 30, 2018 gross revenue and costs on sale to the Spare parts and equipment sales and Cost of spare parts and equipment sales line items from the net gain (loss) presentation within the Gain on sale of leased equipment line item.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing and
Related Operations
|
|
Spare Parts Sales
|
|
Eliminations
|
|
Total
|
Total assets as of June 30, 2019
|
|
$
|
1,874,523
|
|
|
$
|
56,260
|
|
|
$
|
—
|
|
|
$
|
1,930,783
|
|
Total assets as of December 31, 2018
|
|
$
|
1,882,860
|
|
|
$
|
52,083
|
|
|
$
|
—
|
|
|
$
|
1,934,943
|
|
13. Related Party Transactions
In January 2019, the Special Committee of the Board of Directors approved a transaction in which the Company's Chief Executive Officer, Charles F. Willis, purchased a car at its market value of
$0.1 million
from the Company.
During 2019, the Company's Chief Executive Officer, Charles F. Willis, was charged
$0.2 million
for usage of the Company's marine vessel in the Company's lease portfolio.
14. Subsequent Event
On July 3, 2019, WLFC closed on a sale and leaseback deal of
27
CFM56-5C4 engines and the purchase of
five
CFM56-5C4 engines.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our
2018
Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. The financial information included in this discussion and in our consolidated financial statements may not be indicative of our consolidated financial position, operating results, changes in equity and cash flows in the future. See “Special Note Regarding Forward-Looking Statements” included earlier in this report.
Overview
Our core business is acquiring and leasing commercial aircraft and aircraft engines and related aircraft equipment pursuant to operating leases, all of which we sometimes collectively refer to as “equipment.” As of
June 30, 2019
, all of our leases were operating leases with the exception of two leases entered into during the first quarter of 2019 which are classified as notes receivables under ASU 2016-02. As of
June 30, 2019
, we had
83
lessees in
48
countries. Our portfolio is continually changing due to equipment acquisitions and sales. As of
June 30, 2019
, our lease portfolio consisted of
241
engines,
12
aircraft,
10
other leased parts and equipment and
one
marine vessel with an aggregate net book value of
$1,603.2 million
. As of
June 30, 2019
, we also managed
475
engines, aircraft and related equipment on behalf of other parties.
Our wholly owned subsidiary Willis Asset Management Limited (“Willis Asset Management”) is focused on the engine management and consulting business. Willis Aeronautical Services, Inc. (“Willis Aero”) is a wholly-owned subsidiary whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft and engines.
We actively manage our portfolio and structure our leases to maximize the residual values of our leased assets. Our leasing business focuses on popular Stage IV commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce and International Aero Engines. These engines are the most widely used engines in the world, powering Airbus, Boeing, Bombardier and Embraer aircraft.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our
2018
Form 10-K, with the exception of the adoption of ASU 2016-02.
Results of Operations
Three months ended
June 30, 2019
compared to the three months ended
June 30, 2018
Revenue is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2019
|
|
2018
|
|
% Change
|
|
(dollars in thousands)
|
Lease rent revenue
|
$
|
45,025
|
|
|
$
|
43,081
|
|
|
4.5
|
%
|
Maintenance reserve revenue
|
26,475
|
|
|
22,045
|
|
|
20.1
|
%
|
Spare parts and equipment sales (1)
|
14,586
|
|
|
11,653
|
|
|
25.2
|
%
|
Gain on sale of leased equipment (1)
|
5,120
|
|
|
52
|
|
|
9,746.2
|
%
|
Other revenue
|
4,591
|
|
|
1,871
|
|
|
145.4
|
%
|
Total revenue
|
$
|
95,797
|
|
|
$
|
78,702
|
|
|
21.7
|
%
|
______________________________
|
|
(1)
|
Effective January 1, 2018, the Company adopted ASC 606 and has identified the sale of parts from engines previously transferred from the lease portfolio to the Spare Parts segment as sales to customers of the reporting entity. As such, the Company presents the sale of these assets on a gross basis and have reclassified the three months ended June 30, 2018 gross revenue and costs on sale to the Spare parts and equipment sales and Cost of spare parts and equipment sales line items from the net gain (loss) presentation within the Gain on sale of leased equipment line item.
|
Lease Rent Revenue.
Lease rent revenue consists of rental income from long-term and short-term engine leases, aircraft leases, and other leased parts and equipment. Lease rent revenue
increased
by
$1.9 million
, or
4.5%
, to
$45.0 million
in the three months ended
June 30, 2019
from
$43.1 million
for the three months ended
June 30, 2018
. The increase is primarily driven by an increase in lease rates and increased net book value of the leased assets, in each case as compared to the comparable prior period. During the three months ended
June 30, 2019
, we purchased equipment (including capitalized costs) totaling
$53.1 million
, which primarily consisted of
four
engines purchased for our lease portfolio. During the three months ended
June 30, 2018
, we purchased equipment (including capitalized costs) totaling
$104.5 million
, which primarily consisted of
seven
engines purchased for our lease portfolio.
The aggregate net book value of equipment held for lease at
June 30, 2019
and
June 30, 2018
, was
$1,603.2 million
and
$1,542.3 million
, respectively, an
increase
of
3.9%
. Average utilization (based on net book value) was approximately
88%
and
87%
for the three months ended
June 30, 2019
and
2018
, respectively.
Maintenance Reserve Revenue
. Maintenance reserve revenue
increased
$4.4 million
, or
20.1%
, to
$26.5 million
for the three months ended
June 30, 2019
from
$22.0 million
for the three months ended
June 30, 2018
. The increase is primarily related to the increase in engines out on lease with “non-reimbursable” usage fees, generating
$19.8 million
of short-term maintenance revenues compared to
$13.8 million
in the comparable prior period. Long term maintenance revenue
decreased
to
$6.7 million
for the three months ended
June 30, 2019
compared to
$8.3 million
in the comparable prior period.
Spare Parts and Equipment Sales
. Spare parts and equipment sales
increased
by
$2.9 million
, or
25.2%
, to
$14.6 million
for the three months ended
June 30, 2019
compared to
$11.7 million
for the three months ended
June 30, 2018
. Spare parts sales for the three months ended
June 30, 2019
were
$14.3 million
compared to
$11.7 million
in the same period of
2018
. Equipment sales for the second quarter of 2019 were
$0.3 million
from the sale of one equipment package. There were no equipment sales for the three months ended
June 30, 2018
.
Gain on Sale of Leased Equipment.
Gain on sale of leased equipment was
$5.1 million
for the three months ended
June 30, 2019
compared to
$0.1 million
for the three months ended
June 30, 2018
. The
$5.1 million
gain during the second quarter of 2019 reflects the sale of five engines and one airframe. The
$0.1 million
gain during the second quarter of 2018 reflects the sale of two engines.
Other Revenue
. Other revenue
increased
by
$2.7 million
, to
$4.6 million
in the three months ended
June 30, 2019
from
$1.9 million
in the three months ended
June 30, 2018
. The increase in the second quarter of 2019 compared to the prior year period primarily reflects $2.1 million in performance fees earned related to engines managed on behalf of a third party, and to a lesser extent, service fee revenue and interest.
Depreciation and Amortization Expense.
Depreciation and amortization expense
increased
by
$1.7 million
, or
9.0%
, to
$20.0 million
for the three months ended
June 30, 2019
compared to
$18.4 million
for the three months ended
June 30, 2018
. The increase reflects the
larger net book value of the lease portfolio, and the change in mix of portfolio to new generation engines, as compared to the prior year period.
Cost of Spare Parts and Equipment Sales
. Cost of spare parts and equipment sales
increased
by
$2.3 million
, or
22.1%
, to
$12.6 million
for the three months ended
June 30, 2019
compared to
$10.3 million
for the three months ended
June 30, 2018
.
Cost of spare parts sales for the three months ende
d
June 30, 2019
was
$12.3 million
compared to
$10.3 million
in the comparable prior year period. Spare Parts gross margins were 14% and 12% in the three-month periods ending June 30, 2019 and June 30, 2018 respectively. Cost of equipment sales for the three months ended
June 30, 2019
was
$0.3 million
and there were no costs of equipment sales for the three months ended
June 30, 2018
.
Write-down of Equipment.
Write-down of equipment was
$3.3 million
for the three months ended
June 30, 2019
, reflecting a write-down of two engines due to management's decision to part-out one engine and sell one engine to a third party. Write-down of equipment was
$3.6 million
for the three months ended
June 30, 2018
, reflecting the write-down of three engines due to a management decision to part-out the engines.
General and Administrative Expenses.
General and administrative expenses
increased
by
$4.6 million
, or
27.5%
, to
$21.4 million
for the three months ended
June 30, 2019
compared to
$16.8 million
for the three months ended
June 30, 2018
. The increase, when compared to the prior year period, primarily reflects increased bonus accrual due to operating performance and investment in technology infrastructure.
Technical Expense.
Technical expense consists of the non-capitalized cost of engine repairs, engine thrust rental fees, outsourced technical support services, sublease engine rental expense, engine storage and freight costs. Technical expense
decreased
by
$1.8 million
, or
56.5%
, to
$1.4 million
for the three months ended
June 30, 2019
compared to
$3.2 million
for the three months ended
June 30, 2018
. The decrease primarily reflects a decrease of
$1.8 million
in engine maintenance costs.
Interest Expense.
Interest expense
increased
to
$16.8 million
for the three months ended
June 30, 2019
compared to
$15.1 million
for the three months ended
June 30, 2018
. This increase is a result of higher debt obligation balances and increased borrowing cost in
2019
associated with our LIBOR based borrowings and our WEST IV notes. Debt obligations outstanding, net of unamortized debt issuance costs, as of
June 30, 2019
and
2018
, were
$1,285.6 million
and
$1,232.8 million
, respectively.
Debt obligations outstanding tied to one-month LIBOR as of
June 30, 2019
and
2018
were
$397.0 million
and
$666.0 million
, respectively. As of
June 30, 2019
and
2018
, one-month LIBOR was
2.39%
and
2.09%
respectively. Debt obligations outstanding tied to three-month LIBOR as of
June 30, 2019
and
2018
were
$7.8 million
and
zero
, respectively. As of
June 30, 2019
, three-month LIBOR was
2.33%
.
Income Tax Expense.
Income tax expense was
$4.8 million
for the three months ended
June 30, 2019
compared to
$3.2 million
for the three months ended
June 30, 2018
. The effective tax rate for the
second
quarter of
2019
was
22.1%
compared to
27.9%
in the prior year period. The decrease in the effective tax rate was predominantly due to the increase in foreign income.
Six
months ended
June 30, 2019
compared to the
six
months ended
June 30, 2018
Revenue is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2019
|
|
2018
|
|
% Change
|
|
(dollars in thousands)
|
Lease rent revenue
|
$
|
93,394
|
|
|
$
|
82,726
|
|
|
12.9
|
%
|
Maintenance reserve revenue
|
51,825
|
|
|
37,485
|
|
|
38.3
|
%
|
Spare parts and equipment sales (1)
|
32,088
|
|
|
24,639
|
|
|
30.2
|
%
|
Gain on sale of leased equipment (1)
|
14,690
|
|
|
597
|
|
|
2,360.6
|
%
|
Other revenue
|
7,569
|
|
|
3,752
|
|
|
101.7
|
%
|
Total revenue
|
$
|
199,566
|
|
|
$
|
149,199
|
|
|
33.8
|
%
|
______________________________
|
|
(1)
|
Effective January 1, 2018, the Company adopted ASC 606 and has identified the sale of parts from engines previously transferred from the lease portfolio to the Spare Parts segment as sales to customers of the reporting entity. As such, the Company presents the sale of these assets on a gross basis and have reclassified the six months ended June 30, 2018 gross revenue and costs on sale to the Spare parts and equipment sales and Cost of spare parts and equipment sales line items from the net gain (loss) presentation within the Gain on sale of leased equipment line item.
|
Lease Rent Revenue.
Lease rent revenue
increased
by
$10.7 million
, or
12.9%
, to
$93.4 million
for the
six
months ended
June 30, 2019
, up from
$82.7 million
for the
six
months ended
June 30, 2018
. The increase is primarily driven by an increase in lease rates and increased net book value of the leased assets, in each case as compared to the comparable prior period. During the
six
months ended
June 30, 2019
, we purchased equipment (including capitalized costs) totaling
$145.3 million
, which primarily consisted of
nine
engines,
four
aircraft, and
one
marine vessel purchased for our lease portfolio. During the
six
months ended
June 30, 2018
, we purchased equipment (including capitalized costs) totaling $243.1 million, which primarily included 27 engines purchased for our lease portfolio.
The aggregate net book value of equipment held for lease at
June 30, 2019
and
June 30, 2018
, was
$1,603.2 million
and
$1,542.3 million
, respectively, an increase of
3.9%
. Average utilization (based on net book value) for the
six
months ended
June 30, 2019
increased
to approximately
88%
from
87%
for the
six
months ended
June 30, 2018
.
Maintenance Reserve Revenue.
Maintenance reserve revenue
increased
$14.3 million
, or
38.3%
, to
$51.8 million
for the
six
months ended
June 30, 2019
from
$37.5 million
for the
six
months ended
June 30, 2018
. We recognized
$37.4 million
Maintenance reserve revenue on our short-term, non-reimbursable leases during the six months ended June 30, 2019, compared to
$26.8 million
in the prior year period. Long-term maintenance reserve revenue
increased
to
$14.5 million
for the six months ended
June 30, 2019
compared to
$10.7 million
in the prior year period.
Spare Parts and Equipment Sales.
Spare parts and equipment sales
increased
by
$7.4 million
, or
30.2%
, to
$32.1 million
for the
six
months ended
June 30, 2019
compared to
$24.6 million
in the prior year period. Spare parts sales for the first half of 2019 were
$29.4 million
, compared to
$24.6 million
in the comparable period in
2018
. Equipment sales for the
six
months ended
June 30, 2019
were
$2.7 million
from the sale of one airframe and one equipment package. There were no equipment sales for the
six
months ended
June 30, 2018
.
Gain on Sale of Leased Equipment.
Gain on sale of leased equipment
increased
by
$14.1 million
to
$14.7 million
for the
six
months ended
June 30, 2019
from
$0.6 million
for the
six
months ended
June 30, 2018
. The
$14.7 million
gain for the
six
months ended
June 30, 2019
reflects the sale of 11 engines, six aircraft, and three airframes. The
$0.6 million
gain for the
six
months ended
June 30, 2018
reflects the sale of three engines and one aircraft.
Other Revenue.
Other revenue
increased
by
$3.8 million
, or
101.7%
, to
$7.6 million
for the
six
months ended
June 30, 2019
from
$3.8 million
for the
six
months ended
June 30, 2018
. The increase in Other revenue primarily reflects fees earned related to engines managed on behalf of third parties, service fee revenue and interest.
Depreciation and Amortization Expense.
Depreciation and amortization expense
increased
by
$4.6 million
, or
12.8%
, to
$40.3 million
for the
six
months ended
June 30, 2019
compared to
$35.7 million
for the
six
months ended
June 30, 2018
. The increase reflects the larger net book value of the lease portfolio, and the change in mix of portfolio, as compared to the prior year period.
Cost of Spare Parts and Equipment Sales.
Cost of spare parts and equipment sales
increased
by
$5.3 million
, or
24.5%
, to
$27.0 million
for the
six
months ended
June 30, 2019
compared to
$21.7 million
for the
six
months ended
June 30, 2018
. Cost of spare parts for the
six
months ended
June 30, 2019
were
$24.9 million
compared to
$21.7 million
in the prior year period. Cost of equipment sales for the
six
months ended
June 30, 2019
was
$2.1 million
. Spare Parts gross margins were 15% and 12% in the six-month periods ending June 30, 2019 and June 30, 2018 respectively. There were no equipment sales for the
six
months ended
June 30, 2018
.
Write-down of Equipment.
Write-down of equipment was
$4.4 million
for the
six
months ended
June 30, 2019
reflects the write-down of four engines due to a management decision to part-out three engines and sell one to a third party. Write-down of equipment was
$3.6 million
for the
six
months ended
June 30, 2018
and reflects the write-down of three engines due to a management decision to part-out the engines.
General and Administrative Expenses.
General and administrative expenses
increased
by
$10.4 million
, or
32.2%
, to
$42.8 million
for the
six
months ended
June 30, 2019
compared to
$32.4 million
for the
six
months ended
June 30, 2018
. The increase, when compared to the prior year period, primarily reflects increased bonus accrual due to operating performance and investment in technology infrastructure.
Technical Expense.
Technical expense
decreased
by
$3.7 million
, or
53.8%
, to
$3.2 million
for the
six
months ended
June 30, 2019
compared to
$6.9 million
for the
six
months ended
June 30, 2018
. The decrease primarily reflects a decrease of
$3.8 million
in engine maintenance costs partly offset by an increase of
$0.5 million
in outsourced technical support services.
Interest Expense.
Interest expense
increased
to
$34.7 million
for the
six
months ended
June 30, 2019
compared to
$28.7 million
for the
six
months ended
June 30, 2018
. The increase was the result of higher debt obligation balances and increased borrowing cost in 2019 associated with our LIBOR based borrowings and our WEST IV notes.
Income Tax Expense.
Income tax expense was
$11.8 million
for the
six
months ended
June 30, 2019
compared to
$5.8 million
for the
six
months ended
June 30, 2018
. The effective tax rate for the first half of
2019
was
23.7%
compared to
27.2%
in the prior year period. The decrease in the effective tax rate was predominantly due to the increase in foreign income.
Financial Position, Liquidity and Capital Resources
At
June 30, 2019
, the Company had
$88.1 million
of cash, cash equivalents and restricted cash. We finance our growth through borrowings secured by our equipment lease portfolio. Cash of approximately
$169.1 million
and
$199.0 million
for the
six
months ended
June 30, 2019
and
2018
, respectively, was derived from this activity. In these same time periods,
$220.7 million
and
$53.3 million
, respectively, was used to pay down related debt.
Cash Flows Discussion
Cash flows
provided by
operating activities was
$91.5 million
and
$82.0 million
for the
six
months ended
June 30, 2019
and
2018
, respectively.
Cash flows from operations are driven significantly by payments made under our lease agreements, which comprise lease revenue, security deposits and maintenance reserves, and are offset by interest expense and general and administrative costs. Cash received as maintenance reserve payments for some of our engines on lease are partially restricted by our debt arrangements. The lease revenue stream, in the short-term, is at fixed rates while a portion of our debt is at variable rates. If interest rates increase, it is unlikely we could increase lease rates in the short term and this would cause a reduction in our earnings and operating cash flows. Revenue and maintenance reserves are also affected by the amount of equipment off lease. Approximately
86%
and 88%, by book value, of our assets were on-lease as of
June 30, 2019
and
December 31, 2018
, respectively. The average utilization rate (based on net book value) for the
six
months ended
June 30, 2019
and
2018
was approximately
88%
and
87%
, respectively. If there is an increase in off-lease rates or deterioration in lease rates that are not offset by reductions in interest rates, there will be a negative impact on earnings and cash flows from operations.
Cash flows
used in
investing activities was
$24.5 million
for the
six
months ended
June 30, 2019
and primarily reflected
$145.3 million
for the purchase of equipment held for operating lease (including capitalized costs and prepaid deposits made in the period) and
$30.8 million
related to two leases entered into during the first quarter of 2019 which are classified as notes receivables under ASU 2016-02, partly offset by
$158.0 million
in proceeds from sales of equipment (net of selling expenses). Cash flows
used in
investing activities was
$215.7 million
in the
six
months ended
June 30, 2018
. Our primary use of funds was for the purchase of equipment for operating lease. Purchases of equipment held for operating lease (including capitalized costs and prepaid deposits made in the period) totaled
$243.1 million
.
Cash flows
used in
financing activities was
$60.9 million
for the
six
months ended
June 30, 2019
and primarily reflected
$220.7 million
in principal payments and
$3.6 million
in share repurchases, partly offset by
$169.1 million
in
proceeds from the issuance of debt obligations. Cash flows
provided by
financing activities was
$133.2 million
for the
six
months ended
June 30, 2018
primarily reflected
$199.0 million
in proceeds from debt obligations, partly offset by
$53.3 million
in principal payments and
$10.2 million
in share repurchases.
Preferred Stock Dividends
The Company’s Series A-1 Preferred Stock and Series A-2 Preferred Stock accrue quarterly dividends at the rate per annum of 6.5% per share. During the
six
months ended
June 30, 2019
and
2018
, the Company paid total dividends of
$1.6 million
, respectively, on the Series A-1 and Series A-2 Preferred Stock.
Debt Obligations and Covenant Compliance
At
June 30, 2019
, Debt obligations consist of loans totaling
$1,285.6 million
, net of unamortized issuance costs, payable with interest rates varying between approximately 2.6% and 6.4%. Substantially all of our assets are pledged to secure our obligations to creditors. For further information on our debt instruments, see the “Debt Obligations” Note 5 in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In June 2019, the Company entered into the Fourth Amendment and Restated Credit Agreement which increased the revolving credit facility from
$890.0 million
to
$1.0 billion
and extends the maturity of the credit facility to June 2024. As a result, the Company incurred and deferred an additional
$2.9 million
of debt issuance costs and recognized a loss on debt extinguishment of
$0.2 million
relating to the Third Amendment.
In February 2019, the Company entered into a new
$8.1 million
loan with a financial institution with a maturity date of July 2022. Interest is payable at three-month LIBOR plus a margin ranging from
1.85%
to
5.25%
and principal and interest are paid quarterly. The loan is secured by two engines.
Virtually all of our debt requires our ongoing compliance with certain financial covenants including debt/equity ratios, minimum tangible net worth and minimum interest coverage ratios, and other eligibility criteria including customer and geographic concentration restrictions. Under our revolving credit facility, we can borrow no more than 85% of an engine’s net book value and 65% of an airframe’s, spare parts inventory’s or other assets net book value. Therefore, we must have other available funds for the balance of the purchase price of any new equipment to be purchased or we will not be permitted to draw on our revolver. The facilities are also cross-defaulted against other facilities. If we do not comply with the covenants or eligibility requirements, we may not be permitted to borrow additional funds and accelerated payments may become necessary. Additionally, much of the debt is secured by engines and aircraft, and to the extent that engines or aircraft are sold, repayment of that portion of the debt could be required.
At
June 30, 2019
, we were in compliance with the covenants specified in our revolving credit facility, including the Interest Coverage Ratio requirement of at least 2.25 to 1.00, and the Total Leverage Ratio requirement to remain below 4.00 to 1.00. The Interest Coverage Ratio, as defined in the credit facility, is the ratio of: earnings before interest, taxes, depreciation and amortization (EBITDA) and other one-time charges to consolidated interest expense. The Total Leverage Ratio, as defined in the credit facility, is the ratio of total indebtedness to tangible net worth. At
June 30, 2019
, we were also in compliance with the covenants specified in the WEST II, WEST III and WEST IV indentures, servicing and other debt related agreements.
Contractual Obligations and Commitments
Repayments of our gross debt obligations primarily consist of scheduled installments due under term loans and are funded by the use of unrestricted cash reserves and from cash flows from ongoing operations. The table below summarizes our contractual commitments at
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period (in thousands)
|
|
Total
|
|
Less than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than
5 Years
|
Debt obligations
|
$
|
1,306,846
|
|
|
$
|
56,119
|
|
|
$
|
112,811
|
|
|
$
|
632,419
|
|
|
$
|
505,497
|
|
Interest payments under debt obligations
|
246,363
|
|
|
45,422
|
|
|
82,095
|
|
|
57,415
|
|
|
61,431
|
|
Operating lease obligations
|
5,218
|
|
|
1,170
|
|
|
1,819
|
|
|
1,045
|
|
|
1,184
|
|
Purchase obligations
|
179,480
|
|
|
179,480
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
1,737,907
|
|
|
$
|
282,191
|
|
|
$
|
196,725
|
|
|
$
|
690,879
|
|
|
$
|
568,112
|
|
From time to time we enter into contractual commitments to purchase engines directly from original equipment manufacturers. As of the date of this report we have purchased three new LEAP-1B engines and are currently committed to purchasing an additional two new LEAP-1B engines. These engines are solely compatible with the Boeing 737 Max aircraft, the entire fleet of which is currently grounded worldwide. Our expectation is that we will be able to place these engines on lease upon the re-entry of the Boeing 737 Max aircraft into service.
We have estimated the interest payments due under debt obligations by applying the interest rates applicable at
June 30, 2019
to the remaining debt, adjusted for the estimated debt repayments identified in the table above. Actual interest payments made will vary due to changes in the rates for one-month and three-month LIBOR.
We believe our equity base, internally generated funds, including rental income and proceeds from sale of parts and of rental equipment, and existing debt facilities are sufficient to maintain our level of operations through the next twelve months. However, a decline in the level of internally generated funds or an inability to obtain lease commitments for our off-lease engines (including new engines from manufacturers), would limit availability of funding under our existing debt facilities, and/or result in a significant step-up in borrowing costs. Such limits on availability of funding and increased borrowing costs would impair our ability to sustain our level of operations. We continue to discuss additions to our capital base with our commercial and investment banks. If we are not able to access additional capital, our ability to continue to grow our asset base consistent with historical trends could be constrained and our future growth limited to that which can be funded from internally generated capital.
For any interest rate swaps that we enter into, we will be exposed to risk in the event of non-performance of the interest rate hedge counter-parties. We anticipate that we may hedge additional amounts of our floating rate debt in the future.
Off-Balance Sheet Arrangements
As of
June 30, 2019
, we had no material off-balance sheet arrangements or obligations that have or are reasonably likely to have a current or future effect on our financial condition, change in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Recent Accounting Pronouncements
The most recent adopted accounting pronouncements and accounting pronouncements to be adopted by the Company are described in Note 1 to our Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.